By combining working capital optimisation and supply chain finance initiatives, businesses can establish a strong foundation for navigating macroeconomic challenges and achieving sustainable growth. Changing business needs and the integration of digitisation have facilitated a shift in traditional financing approaches.

 

In today’s ever-changing business landscape, with the global economy still reeling from the consequences of the pandemic, successive interest rate hikes and high inflation, the need for efficient supply chains and robust financial strategies has become more important than ever.

Although supply chain finance has been a vital solution to many organisations that have faced unforeseen disruptions in recent times, it is merely one component of a complex equation. In the pursuit of sustained resilience as well as expansion, often into new operations and markets, and with new counterparties, companies must also focus on working capital optimisation, which is essential to maintain a healthy balance between operational liquidity and growth aspirations.

“The conversation with companies over the past two, three years has centred around stabilisation and resilience in the wake of pervasive geopolitical challenges. But in the current high interest rate and inflationary environment, the dialogue has shifted somewhat from reactive measures to proactive strategies as companies look for ways to optimise their businesses while making their cash flows more efficient,” says Pauline Kontos, Global Head of Working Capital Advisory, Treasury and Trade Solutions at Citi.

“We’re now increasingly seeing businesses re-examine their cash flow forecasting practices in order to better understand working capital management,” Kontos adds. “There’s a tighter focus on the cash conversion cycle – the time a company requires to convert sales to cash – to release trapped liquidity in payables, receivables and inventory. Releasing trapped working capital results in less reliance on debt, particularly in a high interest rate environment, improving returns on invested capital.”

A Citi-led survey of almost 1,000 global corporates in late 2022 found that 94% of companies believe easing working capital constraints would help stimulate revenue growth. Fully 48% of corporates surveyed reported grappling with trapped liquidity of between 20% and 40% in their days payable outstanding.

Moreover, with the growing acknowledgement of interdependencies within the supply chain, companies are broadening their scope beyond their own internal operations to consider the working capital needs of their suppliers and sales channels.

“By actively engaging with counterparties across the entire supply chain ecosystem to align payment terms, streamline inventory management and improve cash flow, companies are realising that they can create a win-win situation that strengthens relationships, fosters collaboration, and enhances overall business performance,” says Kontos.

 

Future-proofing legacy financing tools

To address evolving customer needs, Citi provides a range of trade and working capital solutions, such as payables finance, which includes supply chain finance. The bank is a leading global supplier in this sector, overseeing some 4,500 complex multinational buyer programmes worldwide.

Additionally, Citi offers receivables finance, available through a digital accounts receivables finance platform, and trade and working capital (T&WC) loans, which can be accessed via Citi’s Electronic Loans (eLoans) platform.

Receivables finance is an effective means for businesses to convert their unpaid invoices into immediate cash, improving liquidity and enabling them to meet short-term financial obligations or invest in growth opportunities.

“We see many companies using receivable finance as a way of potentially improving working capital metrics while enhancing commercial terms to help increase sales,” says Sanjeev Ganjoo, Citi’s Global Head of Trade Receivables Finance and Global Trade Products Head for Commercial Bank.

Although a legacy trade finance solution, receivables finance has been the focus of recent industry modernisation efforts, driven by technological advancements and changing business needs. Developments have included the emergence of online platforms to connect receivables with investors, as well as automation and digitisation to streamline the typically laborious paper-based processes of manually extracting data from invoices and verifying their authenticity.

Citi has continued to invest in its proprietary channel for receivables finance, which in 2022 managed a throughput in excess of US$120bn. The platform is now available across more than 55 countries.

The bank’s approach to receivables finance involves a comprehensive portfolio-based strategy, where the goal is to expand the range of counterparties and increase the portion of buyers captured.

“In the post-pandemic era, there has been a significant shift in corporate strategy towards portfolio monetisation instead of bilateral financing. While risk mitigation was initially prioritised, the focus now lies on off-balance structures,” says Ganjoo. “As companies expand globally, cross-border risks have increased, leading banks to utilise extensive credit insurance wraps for portfolio coverage.

Insurers are now showing greater interest in diverse industries, and innovative structured solutions are being pursued worldwide. We expect this trend will persist throughout the next decade.”

 

 

Elsewhere, there has been an uptick in demand for the bank’s short-term T&WC loans, with its portfolio having been boosted by several billion dollars.

“Given the volatility in the financial markets, credit spreads have significantly widened, leading to a substantial increase in the cost of capital. Consequently, trade loans and banking debt more broadly have become crucial as a means for companies to finance their business. As a result, there has been a notable increase in demand overall for our T&WC products,” says Christian MacDonald, Citi’s Global Head of Trade and Working Capital Loans.

“In an environment of substantial uncertainty, maintaining sufficient working capital becomes even more crucial for the day-to-day operation of businesses compared to a stable setting.”

The bank’s eLoan digital platform, available via CitiDirect BE, is now available in 72 countries. Use of the platform, where documents can be uploaded, processed and tracked digitally, has risen significantly.

Citi’s innovative approach to trade and working capital is evident in growing demand within new sectors, including shipping pool financing. In 2023, the bank was awarded a Marine Money Ship Finance ‘Deal of the Year’ for structuring a US$150mn uncommitted credit facility for Maersk Tankers to strengthen its pools’ working capital and improve cash flow for pool partners in a volatile and high tanker rate environment.

“This recognition highlights the innovation of this solution, which was a first of its kind in the market,” says MacDonald. “We have successfully replicated this deal with multiple clients and are actively building a strong pipeline in both the EMEA and APAC regions, capitalising on the momentum gained from this transaction.”

As part of its forward-looking approach, the T&WC loans business has also incorporated environmental, social and governance (ESG) principles into its portfolio, executing several deals within the ESG space, encompassing both use-of-proceeds and KPI-related initiatives.

“We’ve got a good pipeline of deals spanning various sectors, such as industrials, electric vehicles and energy. We’ve also identified numerous opportunities in the agriculture and financial institution industries,” says MacDonald.

Citi has expanded its strategy to include mid-corporates and SMEs and has set out to cover this segment in more than 40 countries. “While liquidity management remains important for SMEs, the focus is shifting towards working capital solutions such as payable finance, loans, receivable finance and ECA-backed offerings,” says Ganjoo.

 

Practical steps

In the face of persistent macroeconomic challenges, businesses would do well to acknowledge the transformative opportunities that arise from embracing both supply chain finance and working capital optimisation.

“It is crucial for companies to analyse their working capital data and deploy holistic, multi-faceted strategies, not only for their own benefit but also for their suppliers and distribution channels,” says Kontos.

“Focus on the fundamentals: do you have a supplier early payment programme in place, such as supply chain finance or dynamic discounting?” she says. “Likewise, when it comes to working capital, do you have some kind of accounts receivables programme that you can access when needed, either to unlock liquidity, fund an opportunity or accommodate new customers with longer payment terms?”

By implementing a diverse range of solutions specifically tailored to different aspects of the supply chain, companies can effectively optimise their working capital strategies and position themselves to capitalise on growth opportunities.